Gap Inc Earnings Preview: Strong Growth In April Will Offset Dull February And March

by Trefis Team
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With its deep understanding of customer needs, an expansive product variety and quick response to changing fashion trends,  Gap Inc (NYSE:GPS) has been among the strongest performers in the U.S. retail market. While several players such as Aeropostale (NYSE:ARO), American Eagle Outfitters (NYSE:AEO) and Abercrombie & Fitch (NYSE:ANF) recorded a significant decline in their comparable sales last year, Gap Inc managed to register positive growth. However, start of fiscal 2014 hasn’t been ideal for the company as its comparable sales declined substantially in February and March due to weather-driven store closures and shift in timing of Easter.

Nevertheless, Gap Inc gained significant momentum towards the end of the quarter with 9% rise in comparable sales in April. [1] It appears that improving consumer confidence and successful spring campaign helped the retailer generate better sales than the prior two months. Overall, Gap Inc’s comparable sales declined 1% in the first quarter of fiscal 2014 as lackluster February and March outweighed strong growth in April. [1] We will closely analyze the company’s underlying performance when it comes out with its earnings on May 22.

Our price estimate for Gap Inc is at $51.20, implying a premium of more than 25% to the market price.

See our complete analysis for Gap Inc.

Gap Inc Didn’t Do Well In February And March

While Gap Inc performed very well throughout the last year, February turned out to be quite unusual as the retailer’s comparable sales declined substantially across its brands. For its namesake brand Gap, comparable sales declined by a staggering 10% versus 2% positive in the same month last year. Comparable sales for Old Navy and Banana Republic fell by 6% and 7%, respectively. The company stated that as much as 450 of its stores were closed on different occasions due to bad weather in February. [2] Due to this, it was unable to take advantage of the recovery in the U.S. retail market during the month. Retail sales rose by 0.7% (excluding automotive sales) in February, driven by stronger consumer confidence, which saw its first rise in three months. [3]

Gap Inc’s struggle continued in March as its comparable sales declined by 6% as compared to 1% decline in the same month last year. [4] While the retailer had performed better than the industry in the past, it lagged behind this time. U.S. retail sales jumped 1.1% in March 2014, which was their biggest gain in more than 18 months. [3] Once the weather became suitable for store shopping, U.S. buyers weren’t too reluctant to spend on furniture, clothing, general merchandise, health and personal care, food and beverage, sporting goods etc. However, Gap Inc was unable to grab a sizable share of this spending, which subdued its growth during the month. The company stated that shift in timing of Easter to April also had a negative impact on its March results. [4]

However, The Company Bounced Back In April

Gap Inc was finally able to take advantage of the ongoing recovery in the U.S. retail market in April with its spring collection. After being weighed down by relentless weather and sluggish consumer spending, retail sales in the U.S. rebounded in the first quarter of 2014 with renewed consumer confidence and better employment data. Consumer confidence index in the U.S. reached 100 in the first quarter, propelled by better employment scenario, and rising equity and home prices. [5] Applications for unemployment benefits dropped to their lowest level in more than three months in early March. Labor Department reported a fall of 9,000 in initial claims for unemployment benefits in the first week of March. Average job growth in February and March (195,000) was much better than what it was in the prior two months. In fact, first time jobless benefits applications in early April were at their pre-rescession levels. [3]

Driven by better market conditions and appealing product offerings, Gap Inc’s comparable sales improved by 9% in April on top of 7% increase in the same quarter last year. Toward the latter part of February, the retailer launched its “Lived-In” campaign to promote its spring range of modern and youthful interpretation of classic, casual styles by leveraging emerging young artists including musicians, singers, actors and photographers. This campaign had a wide customer reach as it appeared in March issues of national magazines, outdoor in cultural hubs of key markets and across its social media channels. Gap Inc’s spring collection encompassed a large demographic including men, women, kids and babies with new washed pallets and fabrics along with iconic khakis, denim, tees, etc. [6]

Although these products were launched a while back, their contribution was visible in April as the company wasn’t facing issues of store closure. Moreover, Shift in timing of Easter positively impacted the retailer’s April sales. During the earnings call, we’ll look for more details on the company’s Q1 results and its future strategies.

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Notes:
  1. Gap Inc Reports April Sales Results, Gap Inc, May 8 2014 [] []
  2. Gap Inc Reports February Sales Results, Gap Inc, Mar 6 2014 []
  3. Bullish U.S. retail sales brighten growth outlook, Reuters, Apr 14 2014 [] [] []
  4. Gap Inc Reports March Sales Results, Gap Inc, Apr 10 2014 [] []
  5. U.S. consumer confidence rebounds to pre-crises levels in first quarter: Nielsen, Reuters, Apr 29 2014 []
  6. Gap Presents “Lived-In” Spring Campaign Featuring Cast of Emerging Artists, Gap Inc, Feb 18 2014 []
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